1

Marketing MATH: Formulas to Maximize Your

Marketing Dollars

Bit.ly/mktgmath

2

What’s that Formula?

These slides include

All of the marketing math formulas

You’ve probably heard about

But never understood . . .

© 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

3

Marketing Math Formulas for:

• Marketing Contribution

• ROI • Expense to Revenue • Budgeting Formulas • Breakeven Analysis • CPA Benchmarks • Lifetime Value

• Social Media • Engagement • Conversion Rate • Revenue Per Email • CTR

4

Marketing Contribution

$ Sales Shipping and Handling Fees Gross Revenue Returns and Bad Debt Net Revenue Cost of Goods Sold (COGS), shipping, 800#, credit card costs Gross Profit Marketing Costs Marketing Contribution (to profit and overhead) © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

5

ROI: Return on Investment

Marketing Contribution MINUS Overhead Contribution (typically % of sales) = = Net Profit ROI = Net Profit $ marketing cost $10,000 net profit / $50,000 marketing cost = 20% ROI (the return on the investment before interest and taxes) © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

6

For Every $1 . . .

For every $1 spent on Marketing, we generated $5.50 in Revenue. $27,500 revenue = $5.50 $5,000 marketing For every $1 Revenue, Cost was $0.18 for Marketing. $5,000 marketing = $0.18 $27,500 revenue © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

7

Marketing Expense to Revenue

Expense to Revenue Ratio = Total $ Marketing cost $ Revenue generated If Marketing costs are $5,000 and we generated $27,500 in sales: $5000 X 100 = 18% $27,500 • Our Marketing expenses were 18% of Revenue generated © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

8

PLANNING METRICS Budgeting – with $ Sales Target

Sales Target $100,000 = 500 Target Orders Average Order Size $200

• Cost Per Sale (based on Past Year or Campaign) = $ Marketing Cost / # Orders $50,000 / 625 = $80 Marketing Budget = Cost Per Sale X 500 Target Orders $80 X 500 = $40,000 © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

9

Budgeting – with # New Customers Target

New Customer Target = 1,000 Past Cost Per Order = $ 80 (CPO) Marketing Budget = 1,000 X $80 = $80,000 • Boss says: “you can only have $60,000.” • Your only options:

– Reduce new customer target – Only use marketing vehicles that deliver customers at $60 CPO -- if

you’ve identified any © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

10

Breakeven Analysis (Incremental*)

Gross Profit Per Sale = Average Order Size MINUS direct product costs per order $79 - $39 = $40 Breakeven Quantity = Total $ Marketing Cost / Gross Profit Per Sale $50,000 / $40 = 1,250 orders needed to recover the marketing costs. Breakeven Response Rate = Breakeven Quantity / # Reached 1,250 / 65,000 = 1.92% • Only incremental revenue and costs of a sale are considered, without overhead and profit requirements.

© 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

11

Breakeven Analysis (Incremental)

Other Equations . . . Cost Per Contact = Total $ Marketing Cost / # Reached $50,000 / 65,000 = $.77 each Breakeven Response Rate = Cost Per Contact / Gross Profit Per Sale $.77 / $40 = 1.92% © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

12

Breakeven Analysis with Overhead – Physical Product

$80 Sales Price + $19 Shipping & Handling = $99 Gross Revenue per Sale Returns and bad debt (6%) = $ 4.80 Cost of Goods Sold (COGS) = $16.00 Credit card processing fee (3%) 2.40 800 number ($2/call @ 20% of callers) 0.40 Shipping & Handling costs = 15.00 $38.60 $99 - $38.60 = $60.40 Gross Profit per Sale (continued) © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

13

Breakeven Analysis: With Overhead

Gross Profit Per Sale = $60.40 Overhead (10%) - 8.00 Breakeven Allowable Cost Per Sale = $52.40 Profit (30% of COGS) - 4.80 Marketing Allowable Cost Per Sale = $47.60 Bring in each Sale at a cost of $47.60 to cover overhead and profit. © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

14

BENCHMARKS: How much can you spend to acquire a customer? (CPA)

• Are you willing to just breakeven on each new customer? (Can you rely on customer Lifetime Value to generate profit)?

CPA = Gross Profit Per Sale (incremental breakeven without overhead)

OR CPA = Breakeven Allowable Cost Per Sale (breakeven with overhead)

• Do you need to make a profit on every first sale? CPA = Marketing Allowable Cost Per Sale © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved

15

CUSTOMER ANALYSIS: Lifetime Value (LTV)

LTV = Average $ Sales from Each Active Customer Per Year X Average # Years as Active Customer (continued) © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved

16

Lifetime Value

“Database Snapshot” Approach 1. # “Active” Customers (Customers as of 1/1/12 who made at least one additional purchase in 2012, or your definition of “Active”)

2. Total of all $ sales from those Active Customers over past year Total $ Sales from Active Customers last year = # Active Customers last year Average $ Sales Per Active Customer Per Year (continued) © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

17

Lifetime Value

For EACH “Active Customer” in 2012: Month/Year of Last Purchase (in 2012) MINUS Month/Year of FIRST purchase (first purchase from you) = # Months as Active Customer Total Months from all Active Customers 12 # Active Customers Last Year = Average # Years as Active Customer (continued) © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved

18

Lifetime Value

Total Sales from Active Customers Last Year = $400,000 = # Active Customers Last Year = 20 $20,000 Average $ Sales Per Active Customer Last Year Total # Months “Active” from all Active Customers = 8000 = 40 = # Active Customers Last Year = 20 12 3.3 Average Years as Active Customer LTV = $20,000 X 3.3 = $66,000 per Active Customer © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved

19

Social Media Metrics What should you measure with Social Media? Engagement or Conversions as a % of Total Likes or Followers Facebook: # Comments and Update “Likes” # Page Likes LinkedIn # Comments and Post Clicks # Following Twitter replies + retweets + mentions + favorited* # Followers * All of these are reported under “Interactions.” © 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved..

20

Email Metrics

Revenue Per Email = $ Sales # Emails Delivered Click-Through Rate (CTR) = # clicks # emails delivered

© 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

21

Websites

Visitors to Leads Conversion Rate = # leads generated for a period # web visitors for the period Visitors to Sales Conversion Rate = # sales generated for a period # web visitors for the period

© 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

22

Thank You! Please SHARE

Get the Latest Response Stats: LIKE: Facebook.com/ResponseCoach FOLLOW: @ResponseCoach See the Latest “How to” Posts: BLOG: ResponseBlog.ResponseFX.com Let us Help you Boost Your Response: www.ResponseFX.com – sign-up for our enewsletter

© Copyright 2012 Strategic Marketing and Advertising, Inc. All Rights Reserved.